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What is driving health care costs?

A recent report by the Canadian Institute for Health Information provides information about the major drivers of health care costs in the past decade, which include growing salaries for health care workers and greater intensity of treatment.

The report suggests that the aging population is not a major contributor to rising health care costs.

These findings clash with many headlines about the costs of health care, and suggests that while costs are gradually increasing, they are not “out of control”.

Growth in government spending on health care

In our uncertain global economy, the challenge of increasing health care costs is a concern to citizens and decision makers. Health care spending by governments has increased at a rate of 7.4% per year over the last decade in Canada. Like many comparable countries, the growth in health care spending has exceeded the rate of economic growth.

Health spending, while growing at a modest rate, is taking up an increasing proportion of public dollars. In Ontario, health care spending in 2011/2012 is projected to be over $47 billion of the provinces’ $124 billion expenses. Crowding out of other expenses, such as housing and social services, is a challenge decision makers must face with growing health expenditures and shrinking government revenues.

The figure below shows that Canadian health care spending in the past 35 years has mirrored the fiscal circumstances of the government. The dramatic decrease in health care spending during the recession of 1991 to 1996, between the red and orange lines in the table below, strongly suggests that the same might happen in the next few years.

No demographic time bomb

Although many Canadians believe that the aging population is driving health care costs in Canada, the CIHI report suggests that this is not the case, which is consistent with other research. While total health care costs doubled from 1998 to 2008, the share spent on Canadian seniors hardly changed at all – from 43.6% in 1998 to 43.8% in 2008. To read more about the debate on whether the aging population is affecting the sustainability of the heath care system, click here.

Salaries are a major driver

The salaries of doctors, nurses and other skilled health care professionals have risen more quickly than the average Canadian salaries in the last decade. As well, the report notes that compensation for doctors grew faster than the wages of other health and social service workers in the past decade. With the Ontario Medical Association and Ministry of Health and Long-Term preparing for the renegotiation of physicians’ salaries through the Physician Services Agreement in March 2012, this is an area many will be watching to see whether growth is curbed.

Over one in four health care dollars in Canada is spent on hospitals. With about 60% of hospital budgets consumed by staff wages, this is a major component of health care spending .

Hospital cost drivers

The report identified the costs of providing hospital care as “another area worth monitoring” given the costs of medical technology and rising staff salaries. Hospital costs decreased significantly from 1991 to 2001, both in absolute terms and as a proportion of the health care budget. The hospital share of total public health care spending was 47% in 1991, and was reduced to 37% in 2001. However, in the past ten years the proportion of health care spending on hospitals has remained steady at 37%.

The past decade has seen changes in how people use hospitals – a higher intensity of services for hospital inpatients, fewer hospital beds and more hospitals shifting to providing more outpatient procedures . While hospitals in Ontario are generally felt to be efficient, there are challenges in meeting future demands.

Pharmaceutical costs – a mixed picture

Drugs greatly benefit many patients, and are also an important cost driver. Over the last few years, the changes in drug costs has been complex. Fewer new drugs on the market, a number of drugs coming off patent, and more price negotiation by governments have contributed to a decline in the growth of drug costs. On the other hand, greater use of drugs by Canadians (such as drugs to decrease cholesterol) and an increase in the population has contributed to a small overall increase in drug costs. In 2001, drugs accounted for 8% of public health care spending; this increased to 9% in 2011.

The figure below shows the share of public health expenditures accounted for by hospitals, doctors, drugs and other health care institutions over the past 20 years.

The facts and the future of health care

Knowing the drivers behind health care costs, do you think that there is a way for some of these cost drivers to curbed? Join the debate.

What do you think the best way is to curb the growth of health care costs?

Limit growth in salaries to health care providers such as doctors and nurses

More aggressively manage the introduction of new drugs and technologies through technology assessment and price control of drugs

Continued reduction of expensive hospital inpatient services and expansion of home and community care

Increase the proportion of private health spending, and decrease public health spending

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This article has been closed to comments. 12 comments

Laith BustaniNovember 24th, 2011 at 1:50 pm

I have had the tremendous privilege of discussing this issue with my colleagues and with academic researchers in economics and health policy over the past five months in my role as Chair of the section on Hospitalist Medicine with the OMA, responsible for drafting a proposal for how inpatient care should be funded in Ontario.

I am inviting two of these colleagues who provided key insights from the science of management/health policy and economics to participate in this debate.

I am not at liberty to divulge the details of my recommendations to the OMA Negotiating Committee for the 2012 PSA, but suffice it to say, it is a dramatic departure from the status quo.

I did not vote in this debate’s question, because none of the options in the questions are, in my opinion, acceptable.

There are other possibilities that require a bolder re-imagining of health care. However, to “force” even one more suffering individual to pay more (through taxes or privatization) or work for less (through limiting salaries and “squeezing” more from front line staff) or be turned away from hospital services when they are in a crisis, or be denied access to innovative drugs and technologies would be a fundamental violation of my oath as a physician.

I will do all that I can, until it is determined that others can do it better, to further the health of my patients. I know many of you are doing the same. Thank you.

Thank you for this piece. It’s great to see a distilled version of the CIHI report and get a clear picture of where the cost drivers are. I think it’s really important to focus in on this idea that everyone is using ‘more’ care and that is one of the major drivers. As both a family doc and a public health oriented person, I think it’s worth remembering that the major strides in health on a population level are often not made through the very expensive technologies that are at our disposal, as necessary as they can be at certain times.

Temporarily living in the US, I have noticed a culture of assuming that ‘more is better’ when it comes to consumption of healthcare services, and we may be suffering from a bit of this in Canada as well. We need to include frontline providers in thinking about our healthcare system as one public entity shared by us all so as not to ration care, but rather practice less defensive medicine that may seem to be providing more but can often actually lead to higher costs and complications, depending on what the service is.

Also, I think we need to take a hard look at physician salaries. I don’t think physicians are being ‘squeezed’ (look at where our salaries are compared to the rest of Canadians) and the discrepancy between remuneration for many specialists compared to family docs is unacceptable. I don’t think the solution is to increase the floor but to lower the ceiling so as to spend our money in better ways to improve health and to decrease the sometimes toxic primary care – specialist hierarchical gap that exists.

When it comes to health care, “more” is not necessarily better. What’s important is not more consumption of resources but improved health. Every additional dollar spent on paying for health services incurs an opportunity cost, so it behooves us to spend these precious dollars wisely. As total health care spending approaches 50% of provincial expenditures, money will be taken away from other sectors such as education. So let’s make the most of the dollars we have, not in terms of number of resources used, but in terms of better health outcomes.

Of course the aging population isn’t driving health care costs. They havn’t hit the right age group yet. The first boomers became 65 last year and they, in terms of maximun impact on the health care system, won’t begin to have it for another 8 to 10 years. And then, watch out. The early boomers and pre-boomers had lowest debt to asset ratios os any demographic group in the country, and the mid and late boomers have reversed that. So they have no money to pay for services out of their own pockets and have the same type of expectations about their health care system as those who have predefined benefit packages and have underfunded them. Ultimately, the impact will come. I remember the NHS saying that by 2030, hip fractures would consume the entire health care budget – I thought they were being alarmist, now I’m not so sure.

What has contributed? Far too many things to be exhaustive here – but suffice it to say that for every complex problem, there is a simple answer, and it is always wrong. It is far to easy to pin the blame on hospitals, providers etc. The problem is a far bigger social problem – both in terms of what is realistic to pay for health care, inadequate incentives for prevention in the population, no action on smoking (just as many smoke now as 25 years ago in raw numbers), and a system that we want to behave like a Ferrari and has been constructed like a wheel barrow. If we were to start from a blank page, we would have a health care system that bears no resemblence to the system we have now – we would have fewer and smaller hospitals, we would have a far different mix of providers with new classes of providers doing high volume, simple work for alot less money, we would have a different funding system and a different payment system – oh and we would have a fully integrated electronic communication system (like your bank or grocery store). Great to aspire to but we’ve blown the money on billion dollar hospitals, pointless research that is not goal and priority directed, endless increases in administrative costs, no rational approach tothe use of drugs or technology, no rationale about how to harvest the productivity quotient and no long term care strategy. And lastly we still thing health care is free, user and provider alike.

So, and to end, if we are looking for someone to blame, let’s all collectively pick up a mirror, look long and hard, and finally agree that the problem is us.

This is a good story but it misses the point. Take a look again at the CIHI data in Figure 3. The measured categories do not add up to 100%. In fact the ‘other’, unaccounted for expenditure sits at 24% of the total; up from 19% in 1991. This approximates the amount spent on doctors and drugs combined. In real terms, with health-related spending approaching 200 billion dollars per year, this amounts to almost 50 billion dollars per annum! It is well and good to recommend cuts or freezes to the visible parts of the system but any cuts there would accomplish very little in terms of real savings and would be certain to impact negatively on health care delivery outcomes. It would be preferable, in my view, to identify what is contained in the ‘other’ 24% and to ask the really tough question as to whether or not we need all of it – or any of it. A 50% reduction in this invisible portion would go a long way to balancing the combined deficits of all of the provinces and would bring Canadian health care expenditure (as measured by the percentage of GDP) into line with some of the more efficient systems in industrialized world. This measure would also better prepare the system to cope with the challenges that lie ahead. At the very least, it would be nice to know where all that money is being spent.

In response to Dr. Sargeant, who asks what constitutes the “other 24%” of public sector health spending in Canada.:
According to 2011 forecast numbers from the Canadian Institute for Health Information (CIHI), the 24% breaks down as follows:
– public health (9%); capital expenditures (5%); health research (2%); administration (2%); other health professionals (1%); and other spending (5%) – which includes medical transportation, hearing aids and appliances, voluntary health associations, as well as explicitly identified home care services.
This information can be found in CIHI’s report, National Health Expenditure Trends, 1975 to 2011, which is publicly available as a featured product on our website at http://www.cihi.ca.
Thanks for your interest!

The percentage of the Ontario population over age 65 is projected to increase from approximately 14% to 23% by 2036. Although it is true that it is not aging per se that increases costs, there will, undoubtedly, be increased costs. This population has more chronic diseases than younger adults, but our system is set up for acute care. The incidence of dementia increases as we live longer and people with advanced dementia live in long term care homes and a large portion of ALC hospital beds. And we die when we are old. End-of-life care is typically where most costs occur.

There are no easy solutions, but there are things we could do. If we could figure out how to reduce obesity and inactivity, we could reduce chronic disease markedly. No easy task. We also need to change the system to focus more on managing chronic disease and use technology to help both patients and physicians do that. We need more community options to hospitals. We need to develop technology and alternative strategies to help those in early stages of dementia to remain in the community longer and to support their caregivers. And we need to do a better job helping families and patients make end of life decisions that are right for them and that often mean less futile treatment.

One thing that I feel we are being mislead by is the idea that old people are expensive. I find my older patients teach me things that greatly enhance my ability to help myself and others navigate an often confusing world. Dementia is terrifying when it robs people of their ability to interact, but up to the point of disengagement, all people have great wisdom to share with us. It is our lack of time to listen to their stories and over-delegation of their needs that contributes most to spiralling costs.

I have seen 100+ year old patients with no statistical chance of survival delight an entire ward with stories and smiles. She was stuck in our institution waiting for a LTC bed. Our staff were brilliant in making her part of the “family”, and she actually helped other patients get better quicker. Her family helped ease her suffering by making her ward room a “home”, filled with warmth and loving people. Heaven forbid she end up in an isolation room, because she was infecting all of us with good feelings.

Human kindness is often the best medicine. We don’t need to wait for permission to give it.

A key driver of health care costs is the inefficiency of the health care system; Canada ranks below most countries in effiency.
One of the causes of inefficiency is poor uptake of evidence based efficient practices that would save money.
One example is the almost 100% reliance on hospitalization for people who are acutely mentally ill. According to CIHI , of the 20 most expensive illness groups to treat in hospital, mental disorders rank 6th; cost $ 1 billion a year, and an average of $ 9000 per patient.
Intensive home treatment enables about 40% of patients destined for admission to be treated at home, or in an inexpensive crisis residence; it can facilitate early discharge of about 40% of in patients. In the UK this has resulted in savings of $4000 per patient over 6 months.
There is only one intensive home treatment service in Ontario: the Hazelglen Service at Kitchener’s Grand River Hospital. BC is more innovative; has at least 3 teams-the latest-at Vancouver General-enabling the closure of a complete 17 bed psychiatric ward.

These are all valid reasons but I think these are symptoms of a more basic and fundamental issue, that being Doctors as the keepers of our health records, which ultimately makes them responsible or be the driver’s seat for our health and make us completely illiterate and irresponsible for our own health. People are taking drugs for lowering cholesterol because they are listening to their doctor but at the same time eating a Big Mac. Unless people are given the authority and responsibility of owning their health records, they will never be in the driver’s seat of their health and it will be an illusion that doctors will know all about us and they need to be compensated more and more for this responsibility which they cannot fulfill given the 10 minutes they spend with each patient, while the patient has no knowledge to discuss his health issues with another provider or even research his own problem. Would it not be wiser for each of us to be an expert on our own bodies and lives and have the doctor as a partner in our journey to better health? Just reducing the burden of storing our health records and taking off the stress from doctors on being experts on 10 patients they have in their practice will drive down our costs.

This document is provided under the terms of a CreativeCommons Attribution Non-commercial Share Alike license. The terms of the license are available at: http://creativecommons.org/licenses/by-nc-sa/3.0/. Attributions are to be made to HealthyDebate.ca, a project under the direction of Dr. Andreas Laupacis, at the Keenan Research Centre, Li Ka Shing Knowledge Institute of St. Michael’s Hospital.